EIS Round Table | GBI | September 2019

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GB Investment Magazine · September 2019

Round Table

PARTICIPANTS Andrew Aldridge

Mark Brownridge

Partner, Head of Marketing,

EIS Association

Deepbridge Capital

T: 0750247104 E: Mark@eisa.org.uk

T: 01244 746000 E: Andrew.aldridge@deepbridgecapital.com

Dan Perkins

Patrick Wilmot

Managing Director,

Financial Planning Consultant,

Great Point Investments

Positive Solutions Limited

T: 020 3873 0020 E: dperkins@greatpointmedia.com

T: 01494 782088 E: PatrickWilmot@Thinkpositive.co.uk

Daniel Rodwell

Richard Phillips

Chief Executive,

Network Development Director,

GrowthInvest

ValidPath Limited

T: 020 7071 3945 E: enquiries@growthinvest.com

T: 07305 717 614 E: richard@validpath.co.uk

Fabian Bullen

Thomas Lindup

Senior Partner,

Chief Operating Officer,

St. James’s Place Partnership

Velocity Capital Advisors Limited

T: +44 (0)1799 543883 E: Fabian.Bullen@sjpp.co.uk

T: +44 (0)20 7139 4450 E: tom@velocity.co.com

Jim Reeve

Tony Catt

Director,

Freelance Compliance Consultant

Great Point Group T: 020 3873 0020

T: 07899 847338 E: info@tonycatt.co.uk

Ketan Patel

Jonathan Smith

Chartered Financial Planner,

Partner,

Prerak Financial Services

Warrender Advisors Ltd. E: js@warrenderltd.com

T: 07771 997857 E: info@intrinsicfs.com

Bharti Shetty

Nigel Welch

Director,

Director,

Lotus Financial Ltd

TS MACKENZIE E: nigel501@blueyonder.co.uk

T: +44 (0) 208 292 0938 E: lotusom@blueyonder.co.uk

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NEW RULES, NEW ERA FOR EIS New rules have changed the EIS landscape but don’t believe that means there are fewer opportunities

T

he EIS industry has been through a transformative year that has impacted inflows but it doesn’t mean that adviser interest is waning, quite the opposite.

preservation business, HMRC used the subsequent Autumn Budget to move EIS back to their original purpose: investing in higher risk start-ups that benefit the UK economy.

In the tax year 2016/17, a total of 3,470 companies raised a total of £1.7 billion through EIS, which are the most up-to-date figures HM Revenue & Customs (HMRC) has.

This included an enhanced regime for ‘knowledgeintensive’ companies and investors, who can invest up to £2 million a year in EIS companies as long as £1 million of the total is in knowledgeintensive companies.

Unsurprisingly, the 2016/17 total was a drop on the previous year’s £1.9 billion raised by 2,260 companies, as the EIS industry battled a number of uncertainties.

Considering the changes that have happened in EIS and the clampdown on funds offering capital preservation rather than growth, the 2017/18 figures are likely to report a further tick down, according to Mark Brownridge, Director General of the EIS Association (EISA), speaking at a GB Investments Magazine round table.

‘I suspect [the numbers will] be down to about £1.4 billion,’ he said. ‘Significantly down from the year before, and the year before that.’

‘2016/17’s £1.8 billion was a high figure, so we’re regressing back to where we were before.’

There have been widespread concerns that funds will want to raise less money and find it harder to invest under the new rules governing EIS. Following the government’s Patient Capital Review that showed EIS was funnelling too much money into low-risk capital

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While the industry is slowly adapting to the changes, it is not surprising that inflows have dropped slightly given that some funds are tweaking their investment portfolios and others are concerned about whether they now have suitable companies to deploy money into.

Brownridge does not expect the slowdown in inflow to continue.

‘I think it’s a bit of a one-off, at least that’s what I’m hoping,’ he says. ‘It proves the point about why the government has stopped this type of [capital preservation] product, as it seems to be where the problem lies.

‘It shows that you can’t invest in a low-risk manner.’

Although the overall EIS inflow figure is likely to be lower, Fabian Bullen, Senior Partner at wealth management firm St James’s Place, says investors are still willing to place their money into taxefficient investments.

Round Table

He says he would ‘be surprised if [the amount clients invest into EIS] is down’.

‘In my own client practice, the actual figures are slightly up compared to the previous year, as new clients are coming in,’ says Bullen.

The interest in EIS is often down to one simple thing: ‘People don’t like paying tax,’ says Bullen.

‘A number of people have breached their lifetime pension level, and they’re still relatively young. They’re keen to invest, to build up their pensions, and reduce tax liability. We’re still seeing opportunities in those areas,’ he says.

Tom Lindup, Director at EIS and SEIS provider Velocity Capital Advisors, says he is ‘seeing more advisers utilising EIS’.

‘I think if numbers are down, it’s not because there are fewer advisers doing it,’ he says. ‘Last year we grew over 30% so we’re not seeing that. I am seeing more and more new advisers who are interested in the space and are trying it for the first time.’

He adds that advisers ‘understand why the market has changed’ but ‘the biggest thing for them is that this is a government-backed scheme, which gives validity’.

Daniel Rodwell, Chief Executive of GrowthInvest, a platform which allows advisers to access alternative investments for their clients, says advisers are using multiple EIS in order to spread clients’ portfolio risk.

‘With regard to advisers that come to us right now, they’re using us and saying: ‘OK, I’ve got £200,000 and I want to invest into at least four different fund managers to spread the risk’. This means they are accessing a greater number of companies,’ he says.

HMRC’s review of the sector could be seen two ways; that it is unhappy with the way the sector is operating because it has clamped down on capital

preservation funds, but that it is also relying on taxefficient investments to fuel the UK economy as it has increased its funding limits.

‘It’s a great benefit to the economy,’ says Bullen, who adds that he would like to see more reporting from the EIS industry on why it is good for the economy and provide up-to-date information about the economic benefits.

He says it would provide confidence to investors and show the government isn’t going to ‘back out of the scheme...as it’s good for the economy’.

Brownridge says his own interactions with HMRC in 2017, the year of the Patient Capital Review were positive and it was keen for the industry to provide growth.

‘They want to encourage the industries that are doing well,’ he says.

‘Particularly with Brexit coming, we’re going to need those industries to really take off: artificial intelligence, cybersecurity, technology. The more money we can get to those areas, the better.’

There is a lot of money flowing into technology, as funds search for the next great disruptor but there are more established areas of tax-efficient investing that have had a facelift: creative and media investment.

Many advisers will remember the bad old days of dodgy film funds, and the reputation they left behind has tainted the appeal for advisers, but they should take another look.

Dan Perkins, Managing Director, Great Point Investments, says: ‘The creative industries sector is a well established and significant contributor to the UK economy. Whilst it is true to say there were a number of film investment schemes marketed 15 to 20 years ago that have made the headlines

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for the wrong reasons, these are a world apart from the media investments now available not least because of the HMRC Advance Assurance process that all investments have to follow before receiving funding.’

Perkins says the new risk to capital conditions had the ‘naysayers saying “that’s probably it for media”’ but contrary to that he says we are seeing plenty of growth in our sector and it is encouraging to see new players entering the sector that have traditionally taken a more generalist approach, such as Calculus Capital.

‘The playing field has been levelled,’ says Perkins.

‘All EIS investment is now purely growth focussed, irrespective of sector. For investors and advisers, the main risk mitigation tool available now is diversification, meaning that spreading your EIS investment across manager and sector is the only sensible approach.’

of our sector and as a team of highly experienced media professionals this shift has been a positive as it helps highlight that the creative industries can be just as lucrative in terms of returns as other sectors such as tech or life science. By introducing the risk to capital conditions in this way, hopefully the regulatory environment will now enjoy a sustained period of stability giving investors and advisers confidence as to what qualifies and what doesn’t.’

Velocity’s Lindup says his company does not do much investing into creative industries, but does have a focus on technology.

‘I suppose we are one of the luckier funds, in the sense that [the change to rules] hasn’t altered our investment structure at all,’ he says.

He says Great Point is ‘starting to successfully get the message out that the creative industry is alive and well and open for business’.

‘It was always pure equity, and it was always pure equity that was at risk. I suppose the other questions are; what do we see in terms of the calibre and number of businesses that we see to invest in; and secondly, what do we sense the appetite is amongst potential investors for investing in those businesses?’

Perkins adds that there has been a shift in the types of investments Great Point is making following the risk rules.

The answer to the first question may be disappointing for investors as Lindup says there ‘are a lot businesses out there, but there’s a lot less very good ones’.

‘Ironically, it wasn’t necessarily the level of risk we were taking previously that was out of kilter with HMRC’s approach to EIS - more the project based nature of our investment strategy which focussed on the production of television shows. Going forward, our strategy is based on a pure equity-based approach, supporting entrepreneurs to grow their creative industry focussed businesses,’ he says.

‘From an investor appetite side in terms of the education piece, what we’ve experienced is that there’s clearly a feeding through of understanding both from an advisor perspective and their clients, with the risk associated with EIS,’ he says.

‘HMRC have not removed the sector from EIS qualification, simply re-purposed it to ensure funds are supporting equity based growth. They have subsequently confirmed they remain supportive

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‘I suppose we’re like any other fund: we invest to achieve growth and make money.’ GBI

Round Table

RISK, MORE REWARD, MORE RESPONSIBILITY MORE

Advisers have increased their due diligence around EIS investments as the risk profile of funds increases and puts more at stake

W

ith a renewed focus on growth within EIS, advisers are having to deal with more risk and are increasingly getting under the bonnet of investments.

‘I think share loss relief is a huge benefit of investing via EIS or SEIS when compared to other tax efficient structures out there such as VCT, especially when investing in high risk, early stage businesses,’ he says.

There is no such thing as a risk-free investment and HM Revenue & Customs (HMRC) was keen to hammer this point home when it changed the rules around EIS to refocus the industry back onto growth companies and ensure tax relief was encouraging investment into UK plc.

‘If you’re focused on growth, which everything should be now, then you’re going to get businesses that lose.

When that happens, you want share loss relief to be available to protect your downside whilst enjoying tax free upside on the ones that win.’

This has meant an end to the capital preservation strategies used by some providers that enabled investors to benefit from generous tax relief but also reduce how much risk they took with their money - not exactly within the spirit of EIS. There are some in the industry reviewing their investment portfolios, but advisers will also have some work to do in educating clients about the changes, and the fact that their EIS investments will carry greater risk.

Speaking at a GB Investments Magazine round table, Dan Perkins, Managing Director at Great Point Investments, which invests in the media and entertainment industry, says one of the key protections afforded to investors by EIS and SEIS qualifying investments is that of share loss relief.

Loss relief allows investors to offset a loss made on an EIS or SEIS qualifying company against their capital gains tax bill or their income tax bill, whichever suits them better.

Tony Catt, Compliance Consultant at TC Compliance Services, says as an EIS matures there should be better statistics available for advisers to use to put losses and successes into context for their clients.

This means clients can gain a more rounded picture of their investment, and better understand that in a growth-focused portfolio, some of the investments will fail.

‘As the funds mature you should have better statistics available about the failures and successes that have occurred in the fund, so you should be getting a much better picture of where you are, why a particular company in the portfolio has failed, and what support processes were in place that it didn’t take advantage of,’ he said.

‘All of these things market matures.’

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helpful

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EIS

Catt adds that there will always be ‘good and bad stories’ but greater transparency within the fund means at least clients ‘get the reasons behind those’.

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‘You can produce statistics about whether EIS-based companies fail, especially compared to those that didn’t have EIS investment,’ says Catt.

due diligence processes when looking at EIS; grilling providers on the companies they invest in and their own governance.

‘Then, advisers can tell that the company that’s in an EIS has a greater chance of success, which is a great thing to tell their clients. That’s something tangible they can use as a selling point.’

Dan Perkins, Managing Director at Great Point Investments, says ‘due diligence processes have significantly improved’.

THE NEED FOR INFORMATION While these statistics are certainly beneficial for advisers, and their clients, getting hold of the information may not be that easy, and smaller oneman-band advisers may find they do not have the time to chase up every fund, forcing them to use an outside source. Even information from external sources can be lacking, however; Fabian Bullen, Senior Partner at wealth management firm St James’s Place, says: ‘We have people that provide us with all the background information but that doesn’t necessarily mean that we’re in the best position to determine whether we have the right information for a client portfolio or not.

‘A lot of the questions included in the due diligence questionnaires we complete for our products now focus on investment process and governance issues to ensure your strategy is robust and gives the fund the best possible chance of success,’ he says.

‘For us, even as a small business, our biggest clients now expect us to have near institutional levels of governance.’

UNDERNEATH THE BONNET Once upon a time, tax-efficient investments may have been secret portfolios full of niche companies, but this is no longer the case and funds are increasingly bringing advisers and clients into direct contact with underlying investment companies.

‘Sometimes the information is still a bit too scant, and we can’t ascertain whether it will be a useful deal.’

Perkins says that ‘people are interested in what the business is, what it’s doing, and how it’s performing’.

Andrew Aldridge, Head of Marketing at EIS provider Deepbridge Capital, says external independent reviews ‘are a lot better than they were a few years ago’.

‘All of that is actually very important to the investor and the adviser,’ he says. ‘Having moved into the venture capital space in the past 18 months and made our first investments, it has been interesting to hear from advisers how keen they are to have access to the underlying businesses and entrepreneurs we are supporting with their clients’ capital. Transparency in everything we do is paramount to us and can only be a good thing for the industry as a whole.’

‘They have much more relevant information, so hopefully advisers have better tools to do the job,’ he says.

This sentiment was echoed by Daniel Rodwell, Chief Executive of GrowthInvest, a platform which allows advisers to access alternative investments for their clients.

‘There are an increasing number of advisers we work with that are comfortable with the type of work we’re doing,’ he says. ‘Also, the client is taking a bit more risk in this new world.’

There is greater engagement from clients and also from advisers, who have significantly improved their

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Aldridge agrees that ‘our advisers find it invaluable to meet the underlying businesses’.

‘Because EIS investments are only a small part of what they do, to understand what we’re investing in and the kind of people behind it, is key,’ he says.

‘It’s also about who they are and what their motivations and ambitions are. Having the advisers and investors meeting the entrepreneurs gives them a large degree of comfort.’

Round Table

Aldridge says Deepbridge funds have invested in a total of 112 companies, including one called Sky Medical that creates medical technology called the ‘Geko’ device, which helps deal with deep vein thrombosis (DVT).

He said as this is an understandable medical issue, clients are willing to buy into it.

‘DVT was one of the largest preventable causes of death in UK hospitals and the western world. This device stimulates a nerve, making the muscles contract and release to pump blood,’ he says.

‘Since we initially became involved with Sky, the Geko is now being utilised in hospitals throughout the NHS. It is a company that went from a great idea to an internationally distributed product.’

Clients are sold on the idea of the Geko because it is a straightforward idea ‘people buy into it because they know what DVT is’, says Aldridge.

People also buy into other people, and meeting the teams behind companies gives EIS fund managers, investors and advisers a good idea of whether they want to hand over their cash.

Aldridge says it is a ‘personality thing’.

‘It’s about making sure you can do business with them,’ he said. ‘You need to get on well with them. The personality test is key.’

GETTING ON BOARD Personality is certainly key for EIS managers as they are typically far more involved in their investments than a normal fund, often putting their own staff on boards, and offering help outside of the realms of a financial arrangement.

Aldridge says Deepbridge is ‘extremely proactive with our companies’ and ‘we work with them handin-glove’.

‘We might be in daily contact with them if there’s a big project going on, and we work with them across the team as well,’ he says.

‘A lot of our companies will also want particular people on our board, with their insights and opinions. Also, we want to hit key milestones before we do things, which gives a little bit more control.’

Deepbridge provides a ‘suite of services’ to companies it invests in and works with them over a range of areas depending on where a company’s strengths and weaknesses lie.

‘They might need someone to help out with marketing, or product design, whatever it might be we can help them with the biggest things,’ says Aldridge.

‘Often what they need help with is global exports, so we need someone from our board who understands that.’

Going back to the example of Sky Medical, Aldridge says the company has gone through the US Food and Drugs Administration process in order to gain approval and ‘that the company has learnt from how it’s done, and now other companies that we’re involved with can go through that process a lot quicker’.

Through this skills exchange, managers build up a set of skills that can benefit more companies and a network of contacts that can help one another, ultimately boosting future company successes.

Great Point’s Perkins says looking at the bigger portfolio picture is an important part of what managers do.

‘Taking a step back and looking at how a company will fit in with your wider portfolio is key,’ he says.

‘When constructing a portfolio you are also building a network of investee companies that in future may be able to help each other grow and succeed. For us this is an important part of the fund manager’s role, as well as picking the best companies in your chosen sector GBI of course!’

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CALCULATE VALUE NOT COST, SAY EIS PROVIDERS When looking at the charges for EIS providers, advisers should be looking deeper at the value smart capital brings to companies

F

ees are always a tricky topic but when delving into the often confusing, world of EIS charges, advisers must focus on value not cost.

It is no secret that charging structures for EIS and SEIS can be very complex, with some funds charging the investee company, some charging the investor, and some charging a mix of both.

The myriad fees that are thrown about can make comparing and contrasting the charges a difficult task, especially as alternative investments are not under the same obligations to set out their fees as transparently as mainstream funds are. As a standard measure, annual management charges for EIS range from 1% to 2% plus VAT of the value of the investment portfolio, plus there can be initial charges from the manager and performance fees - which can be as high as 20% of the profit - to add on top. This is before the adviser has added on the fee for their advice.

Explaining this level of charging to clients may not be easy, but advisers who understand EIS fully can articulate just how much value the managers add and why those fees are put in place.

Fabian Bullen, Senior Partner at wealth management firm St James’s Place, says clients need to understand

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what proportion of their money goes to fees and therefore does not get invested.

‘I have to see all the fees, and all the fees are passed on to the clients,’ he says.

‘With our fees and their fees, not all of [a client’s money] gets invested - quite a reasonable percentage doesn’t get invested.’

He says the fees ‘could be lower, but the price is what you pay, and value is what you get’.

‘I would hope that the fund managers have set their fees at a reasonable figure so they can manage their affairs quite comfortably, so it’s a fair bargain for the fees they pay,’ says Bullen.

Bullen also believes that HM Revenue & Customs (HMRC) could do more to help with the impact of fees on a client’s portfolio as the costs do ‘get in the way of tax planning’ and there could be ‘additional tax relief’ provided so clients would recoup some of the cost of investing.

Daniel Rodwell, Chief Executive of GrowthInvest, a platform which allows advisers to access alternative investments for their clients, said the EIS industry has stepped forward to educate both advisers and clients around charging.

Round Table

‘For the next year, transparency is key,’ he says.

‘People are doing a lot of work on making sure fee structures are transparent so they can be compared.

Most importantly, it’s feeding back performance data and what’s going on inside the funds, which has been really opaque...It’s clear that there’s real risk with EIS, a capacity for loss, and fund managers should no longer be reticent to report the bad stories.’

Tom Lindup, Director at EIS and SEIS provider Velocity Capital Advisors, says advisers must also be aware of the difference in charging structures within providers and said the structure is slightly different at Velocity depending on whether an adviser is investing in the EIS or SEIS. This is due to the fact that companies in SEIS are often smaller and unwilling to absorb costs above a certain level.

‘In the EIS fund you have a 5% establishment fee, and an annual management fee of 2%, which are all charged to the investee company,’ he says.

‘We charge it to the investee company to allow the underlying investor to get more of their tax relief,’ he says.

‘SEIS is 5% again, charged to the investee company.

Under the SEIS fund the investor can claim tax relief on not less than 95% of their funds supplied. The difference is that SEIS companies are under greater constraints than EIS companies and are more often than not unable or unwilling to absorb all of the fees.’

Lindup added that Velocity’s performance fee is ‘20% of the amount returned to the clients over and above 110% of their net subscription amount’.

While those fees may seem high, alternative investment capital does offer far more perks to companies that just financial backing, often bringing specialists onto the board, and offering assistance with areas of business the founders of the company may struggle with.

‘With Velocity, there’s quite a lot of emphasis on marketing and branding, and then there’s access to the wider network, which is other forms of strategists and consultants,’ says Lindup.

‘That is the reason why [the management fee is] charged to the company, because it’s effectively providing access to the services that companies of that size probably wouldn’t otherwise get access to.’

Andrew Aldridge, Head of Marketing at EIS provider Deepbridge Capital, says that investee companies have a budget for raising capital.

‘I think it comes back to smart capital. Most companies will build in a cost of fundraising,’ he says.

However, he admits that charges to the investor can seem ‘opaque’.

There will always be fees charged, clients are not unfortunately going to escape that, and so Dan Perkins, Managing Director at Great Point Investments, which invests in media and entertainment opportunities via EIS and SEIS, says the best thing to do is maximise tax relief.

‘Our fees are structured to maximise tax relief available to the investor’ he says. ‘We’re also keen to ensure our interests are aligned with those of the underlying investors.

‘When we first set Great Point up in 2013, our opinion was that all stakeholders in our investment strategies were driving towards the common goal of successful exits. As such any performance fees we charge should be structured to ensure we are motivated to deliver on this common goal of delivering real upside upon exit, which I think is very important when you’re in a venture capital world.’

Aldridge says in highlighting the desire for an exit, he hopes it will better illustrate what value EIS providers play.

‘If an investee company is paying a fee for us, we would hope that the skills we bring to the table lead to a better exit,’ he says.

‘It’s not about cost, but the value for money they’re getting, which is very hard to quantify.’ GBI

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